13 July, 2021
4 min read
Having control over how your retirement savings are invested is one of the many benefits of self-managed super funds (SMSF).
On the flip side, the responsibilities and management skills required to run an SMSF are significant. This is because you’re accountable for your SMSF’s regulatory compliance—not your accountant, financial adviser or solicitor.
In this article, we’ll explore what might make an SMSF more attractive than investing through a super fund, and some of the downsides to consider.
Having an SMSF provides more choice and freedom to access investment options that would otherwise be unavailable through a super fund. This includes assets like art and collectibles—such as stamps and coins—as well as physical gold.
Unlike investing with an industry, bank or retail super fund, your SMSF can borrow to invest in property, typically using a structure called a Limited Recourse Borrowing Arrangement (LRBAs).
This strategy is a good option to help expand your investment portfolio. However, there are restrictions and compliance requirements. The Australian Taxation Office (ATO) has recently warned investors of the dangers of over-investing (and over borrowing) into property within SMSFs.
If you’re an SMSF trustee, you’re entitled to the same reduced tax rates that are available through super. Your investment return is therefore taxed at a maximum of 15% rather than the marginal tax rate which could be as high as 45% for super funds.
Generally speaking, an SMSF fund can have up to four members. Bringing four investors’ money together, offers greater scale to access investment opportunities that may not be available to you as an individual investor. Having scale may also help to keep fees down.
If you value the experience of experts in other aspects of your life, don't discount it when it comes to managing your life savings.
A conversation with a financial adviser could help you decide whether opening an SMSF is a good option.
They can also help with other aspects of your financial life—savings, insurance, tax, debt—while keeping you on track to achieve your goals.
More importantly, they can answer questions like:
If your to-do list is endless and you never quite have time to tackle your personal finances, a financial adviser may help to set you on the right track.
Managing an SMSF is not easy. As the trustee, you need to ensure the fund complies with all relevant regulations otherwise you could face severe consequences for getting it wrong.
If the fund is deemed to have breached its compliance responsibilities, penalties can include fines and civil or criminal proceedings. Depending on the transgression, tax penalties could be levied, including fund returns being taxed the top personal marginal tax rate as opposed to the concessional super rate of 15%.
What investors often overlook is the financial and investment expertise required to run, or be involved in running, an SMSF.
As a trustee, you’ll be responsible for creating and implementing your own investment strategy—one that will need to deliver enough returns to adequately fund your retirement.
This means you need to:
You’ll also need to remain up to date on any changes to legislation that affect SMSFs as these may have compliance requirements.
An understanding of how to manage legal documents, such as a trust deed, is also beneficial. However, a legal professional could help you with this.
The administration and management of an SMSF is time intensive so if time is something you’re short of, an SMSF may not be a good option. On the other hand, many SMSF investors enjoy the sense of involvement and purpose that running their own fund brings.
If you find you don’t have the time or investment knowledge to manage your SMSF, you can outsource this to investment managers, financial advisers or other experts. This will come at an additional cost though.
There is a lot of controversy around what should be a reasonable amount to set up an SMSF.
Depending on the fund’s complexity and structure, set up costs, administration, reporting and legal fees can become expensive so a general rule of thumb is to have around $500,000 as a minimum.
Bottom line: While SMSFs are not for everyone, they do offer significant benefits. Running an SMSF successfully requires investment, legal, super and admin skills—or the ability to get help from people who have those skills. A conversation with a financial adviser or accountant could help you decide whether going it on your own is a good option.
This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. The information in this article is current as at February 2021 and may be subject to change. This information may constitute general advice. The information in this article is factual in nature and does not take into account personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. In some cases information has been provided to us by third parties and while that information is believed to be accurate and reliable, its accuracy is not guaranteed in any way. Subject to terms implied by law and which cannot be excluded, NULIS does not accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.